The Family Financial Facility: Urgent, Overdue, Equitable Fed Support for Those Most in Need

As I write this, thousands of small businesses are clamoring for urgent SBA loans and so many Americans are filing for unemployment insurance that systems have crumpled across the country. At the same time, the S&P rose over three percent since Monday’s open. The reason for this dissonance lies in the fact that key parts of the financial market have been bailed out while ordinary borrowers are stuck and then some. Saving markets won’t salvage the economy – at its root, the U.S. is a consumption-driven economy. If consumers can’t survive, neither will the economy. The Fed must add a Family Financial Facility to all those it has crafted for the financial market and it should open one fast. In this crisis, time is truly money and money is what most families don’t have.

Who’s Gotten What So Far

I sketched out a Family Financial Facility, here and here, before the Fed opened its floodgates on March 23 for money-market funds, primary dealers, commercial-paper issuers, and other huge corporate entities strangled in the crisis largely by their own risk-taking hands. Since then, Congress intervened with a series of backstops not just for health-care, but also airlines, hospitality companies, money-market funds, and other giant businesses. The Small Business Administration also rushed out a $349 billion new facility for businesses with up to 500 employees, but the program is too small and mired in operational complexities rivaled only by the disastrous Obamacare debut in 2013. Low- and moderate-income households will also, if only eventually, get a $1,200 handout.

These intervening events make it clear first that small businesses and average Americans are still getting niggling hand-outs compared to the trillions flooding over large commercial and financial entities. Whether these trillions will be enough remains to be seen, but they are trillions, the market is resuming some signs of normalcy, and everyone else is still hurting – a lot.

How the Family Financial Facility Works

In light of these developments, a new Federal Reserve window should be opened wide. It would provide two forms of support:

For families –The biggest problem low-, moderate-, and middle-income families have had since 2010 is crushing debt burdens used to fund housing, education, and day-to-day life – for more see many of our earlier blog posts. The CARES Act indeed takes care of mortgage debt, but none of the rest. It also doesn’t deal with growing health-care debt for uninsured households, child care for those still working, and the growing credit-card balances on which all this floats until it sinks, taking families and financial institutions along with it.

To provide a short-term credit card safety zone, the Fed should open a new facility – the first of direct assistance to families – aimed at credit-card borrowers. In short, the Fed would buy credit-card receivables from lenders, providing funds back to these companies on condition that the funds be used for forbearance on outstanding debt for the next three months. If the crisis continues, then forbearance does too. When the crisis is over, borrowers have larger balances due back to the banks that they pay off over time on the same terms and conditions that applied before the debt forgiveness began. Bank capital requirements for safety-zone loans are “neutralized” as has already been done for those to giant money-market funds.

For small businesses –The Fed and Treasury call a facility they plan for businesses with over 500 employees the “Main Street” backstop. But to get to the real denizens of Main Street – barber shops, small garages, doctors, dentists, independent cafes, vets, and so many others – programs must target businesses with fewer than fifty employees and do so even if they don’t have a loan or checking account with a bank. And, it should go without saying, these companies also shouldn’t be owned by giant private-equity or venture-capital entities.

What would the Real Main Street Facility provide? Loans on terms comparable to those in the existing SBA guarantee program backed by a 100% federal guarantee with terms suitable for rapid-fire securitization. The Fed plans a liquidity facility for the current program even though a secondary market for it is uncertain. It should do the same for smaller companies even faster and with far greater certainty. If Congress doesn’t expand the SBA guarantee to cover these loans, then the Fed should fund new loans against which banks post collateral to protect the Fed just as is done for giant corporations in the Fed’s facilities for these behemoths. The Fed will take more risk than it likes, but there’s more risk across the economy than any of us like.

I’ve written before that “peoples” quantitative easing increases economic inequality because central banks don’t much care for poor people and, even when they do, huge central-bank portfolios distort markets to the benefit of only the wealthy. That was then, a gentler macroeconomic time in which differentiating fiscal from monetary policy made sense. Now, it doesn’t. God willing, soon it will again.